U.S. antitrust regulators looking into Apple's new subscription service

The U.S. Justice Department and Federal Trade Commission are starting to look into Apple's new subscription service. Right now just looking into the matter and it may not even ever develop into a formal investigation or any actions against Apple. The European Commission is also carefully monitoring the situation as well.

The Justice Department and Federal Trade Commission are looking to see if Apple's new subscription service is in violation of any U.S. antitrust laws since it appears as if it is forcing the media companies' customers into using iTunes as a payment service thus giving Apple a 30 percent profit cut for themselves. The other issue is the fact that the publishers will not have the ability to link to outside sources for users to get their content and will also not be able to have different prices amongst the different sources for their content which could definitely pose antitrust problems for Apple.

Several executives from music streaming services have already commented stating the royalties they already pay to labels for their music and now having to pay Apple 30 percent for any subscriptions they sell is making for an anti-competitive environment and a poor business model. The problem there is the fact that Apple only has a small portion of market share indicating that they are not the leader of an industry thus meaning they can't possibly be making publishers and developers anti-competitive. The other issue is trying to figure out what percent would be appropriate as that can vary and can also become rather complex and authorities are not price regulators.

All-in-all Apple has stirred things up with their new policies and it doesn't appear as if things will be simmering down any time in the near future. Apple has had issues in the past and ended up taking a step back as to not get further heat from authorities so it will be interesting to see if Apple sticks to their guns on this or if this look into their new service makes them take a step back and relax a little on their policy.

Reader comments

U.S. antitrust regulators looking into Apple's new subscription service

from my understanding, anti-competative acts can be undertaken by anyone, not just Monopolies. That is why price fixing is illegal under collusion.

OK, Apple has a small part of the music STREAMING business, but Apple's position otherwise is much stronger when you take into account Tablet sales or App sales (2010 numbers at 82% of the market.)

How they define the market will be interesting. As tablets go, Apple is not the only game in town, but it's the clear leader. If the iPad is considered a PC, then that is a whole different story. THough classification as a PC might not be good for Apple. The worst case is that the iTunes App store is seen as a monopoly on the Apple ecosystem since users have no choice but to either accept Apple's terms or jailbreak. The latter being beyond some, or even not a preferred approach. MOst would not want to have to hack their device to get expected or previously available functionality.

Can someone explain to me what the problem is exactly? Apple has spent the time and money making a product that millions of people are actually willing and happy to spend their money on, while everyone else has to give stuff away for free. These companies now what to use that service(the apple has financed) to sell their product in for
free. As far as I can tell they can cut apple a slice so apple can keep giving us a better product and if the customer doesn't want to they can always buy it somewhere else. Give the customer a choice. I personally don't want to be linked to somewhere else and have to put more of my information out their.

Best Buy doesn't take a 30% of Sirius XM's subscription fees when you sign up and buy/install a radio at their store. They don't take a cut of Xbox LIVE fees when you buy a subscription card.
This is pretty much what the new app store is going to do. Sirius will have to let you sign up in the app now and then give Apple part of their subscription fee. How is that fair?
If Apple wants more money to run the App Store they can raise the fee from the $99 it costs right now or introduce a pro level developer system or something. IMO Apple is in the wrong on this one.

That comparison isn't quite accurate. True Best Buy doesn't take a percentage of your subscription fees, but you're buying a device, which they DO take a percentage of, thus they still make their money. Before Apple gets nothing if you download a free app, and buy a subscription to get content/functionality. That's akin to setting up your own storefront inside the Best Buy, and they won't let you do that either.
Now, I agree that taking 30% of the subscription price seems over the top. Maybe 5%, or charge the developers a flat fee for free subscription based apps (Similar to the 30% they would otherwise earn for the app sale). Apple should definitely be able to get some $ from those using their App Store for profit, but I think in this case they're aiming a little higher than is reasonable.

Yeah. I wouldn't be surprised if Best Buy's take of the hardware MSRP is 50%.
Won't matter that much though as electronics brick and mortar retailers are dying. Best Buy will probably go under before Frys ;) Unless some major restructuring happens and they reinvent their business.
Same thing with Barnes and Noble. They will be the last national chain standing unless they do some major restructuring and reinvent their business. With Borders going bankrupt, who else is left?

Your understanding of Best Buy (and most stores) is incorrect. Best Buy is a reseller - they do not take a percentage. They purchase the product from XM, and then turn around and resells it at the price they think they can charge. Their "cut" is not a an up-front percentage on suppliers, but the difference in what they paid and what they can charge, minus expenses.
This is more than a semantic difference, because it allows stores to compete on price - if store X can reduce their operating expenses, they can charge less than store Y, and win on price. If store Y offers better service, then they can perhaps get away with higher prices and cater to a different class of consumer. The point is, in the Best Buy model, the stores are not guaranteed a cut, but they must earn it by appealing to their customers.. The stores, as well as the suppliers, are exposed to competition, which benefits us, the customers.

Considering that Best Buy's stock took an 8% plunge in 2009 because its margins were too low ( see http://bit.ly/hfeHwV ), and that a quick googling shows they report similar problems nearly every fiscal year ( http://bit.ly/eko0SB ), I think it is safe to say that Best Buy is probably below industry average in terms of margin. But let's give them the benefit of the doubt -- let's say they are hit the industry average. I could only find data on Dixon's, a UK chain, but it indicates net margins of 3-4% ( http://bit.ly/gihoy8 ). Since Best Buy competes in the UK, I think it reasonable to assume comparable margins. I doubt these numbers translate exactly to the USA, but I would be absolutely shocked if the UK subsidiary of Best Buy suffers under 4% margins and the US branch enjoys 4 times that.
td;dr Best Buy's margins are way, way, way below Apple's proposed cut, and set by competitive forces, not by fiat.

Gross margin is 15-20% -- still substantially less than Apple. However, the net margin is what matters here, because Apple charges 30% of the final sale price, not 30% of the cost to the reseller.
If you really need the math, take this oversimplified example of me selling you single book with a gross margin of 20%, which according to the Dixon's article corresponds to a net margin of about net margin of 4%
Using the standard definition of Gross margin = (revenue-cost)/cost
Current:
Buy from publisher: $100
Expenses: $16
Sell to you: $145 (x-116)/x = .2, solve for x
The key point is that Apple's cut is 30% of the $145, not 30% of the $100, so it disproportionately affects margins. If my break even point is 4% net/20% gross margins, I have two options to keep afloat after Apple institutes their cut:
Option #1: Keep the price to the end user the same
Buy from publisher: $40 (120-(40+16-x))/x =.2, solve for x
Expenses: $16
Apple cut: $40
Sell to you: $120
In other words, to keep the price the same for my customers, I have to convince the publisher to take 60% less per book. Not bloody likely. So I have to raise prices, or go out of business. Which brings us to:
Option 2: Pass the increase on to the end user
Buy from publishers: $100
Expenses: $16
Apple cut: $69.60
Sell to you: $232 (x-100-16-.3x)/x=.2, solve for x, Apples cut is the .3x
Can I trim my expenses? Possibly. But Apple's cut is still far more than all my own operating expenses put together. There is no way I can absorb that cost without passing on the increase to the customer.
The obvious retort is that retailers can make it up in the increased volume the Apple store provides. Unfortunately, no. My own expenses may be largely fixed, so that, as my volume grows, my cost per-unit goes down. However, Apple's cut is based on total sales price, so my Apple cost per-unit flat. In other words, the more I sell, the more Apple costs me relative to my normal expenses, and the more they impact my margin, not less.

Best Buy's gross margin is 25% as of end of 2010 according to ycharts.com. They've actually increased their gross margin from 20% to 25% over the last decade. On average, it obviously takes 20 to 22 points of the margin to run Best Buy's business give or take.
In all this, I've never considered the 30% on the cost to the reseller. Only the final price. Hence, why I would say Best Buy's take. Best Buy takes about 25% of the sales price on average across all its products. But my suspicion is that certain products, the margin is a lot more than that, and I would peg those products as: music CDs, movies DVD/BR discs, boxed software, accessories. For mobile sales, I'll need to dig up what their commission from carriers is. It's got to be pretty good as they are willing to eat MIRs (or maybe they get it back with accessories and warranties/insurance).
The moral judgement of whether the toll is based on the final price or on what the reseller achieve on top of the product cost to the retailer doesn't matter that much to me. The big boys will squeeze the content producer either way, and they'll end up in the same place. They will continue to pressure the content producer to continually discount their prices to the retailer until the product is moved. Eg, if they can't sell something, they will squeeze the content producer to discount more or will remove the product from shelves. Do you think Best Buy would eat into their 25%?

It's not a "moral judgement" - it is a huge factor, what clearly separates this from a standard most-favorable-pricing case. It immediately makes the net margin the relevant factor, a fact you conveniently choose to ignore.
Regardless, the above math is set for 20%, but I left the equations in so you can plug in whatever numbers you feel like. There is no combination that lets a Best Buy or a producer survive Apple's cut without drastically raising prices.
I get it - you like Apple. So do I, but I'm not going to let that blind me to the consequences of their actions, even when they are bad.
At least you concede the inevit

You forget that Apple gets a cut of the hardware revenue too - iDevices are not free. But setting that aside, sure Apple deserves a cut for enabling the easy sale - but they are forcing the publishers to use the App Store to sell subscriptions (while taking a 30% cut for something you can't opt out of) AND not allowing them to compete with the App Store on pricing for the subscription outside the App Store. That's the problem - relax either of those two conditions and the outcry will die down.

Yep, Apple is being a bit foolish. These apps are the main reason people want their iOS devices. Otherwise, we might as well use any other smartphone or tablet.
That takes a lot of guts to sit and target your partners for almost a third of what is their main revenue stream in many cases.
Netflix, amazon and others don't NEED to offer iOS apps. What will Apple do when all these big names pull their apps and focus on others instead like android, wp7, and webOS?
It might be a good idea for these devs (or companies with apps) to get a bit organized and form a union of sorts. They need a bit of leverage. Sure Apple built the system, but 3rd party devs made it thrive.
The problem is, there's no dialog. Apple just announces the rules and changes them at their whim.

I'm thinking this may "scare" Apple into taking a step back. I would LOVE to see the negative press Apple gets when/if some major retailers pull their apps from the App Store.
The solution that I think a lot of companies will come to will be to just take the link out of the app. They can say "In order to use the Rhapsody app you need to sign up for service, which can be done by visiting rhapsody.com/iphone." That way Apple doesn't get their cut and it only slightly inconveniences the user.

That's the problem - they have to take the link out anyway. No apps that offer subscription based content can link out to the publishers site. They also can't get around it by telling people to sign up outside - any subscription app must allow in-app subscription through the App Store. Netflix already faces this problem - you sign up externally - no in-app signup.

I meant to state it as if the app does not actually link to an outside webpage, just provides an avenue for the user to navigate themselves. I hope they can do that. If not, Apple has crossed another line that makes it that much easier for me to justify my move from Apple to another platform.

IMHO Apple is smart. They have a very successful app distribution system. Thats what draws so many to the iOS system and why they have more useful apps than other free platforms. If a company doesn't agree with Apples measly 30% share they are able to go to any other OS platform Apple isn't forcing anyone to only use their app store. Similar to a franchise like McDonals...they take a percentage of sales...if you don't want to do that you make your own burger stand and hope you can compete. The gov't can't handle our tax money why are they even dabbling in the tech world?? More gov't...not a good thing.

The government is supposed to be the last gate against business practices that harm the public good. (That's the idea, but as you know, all human endeavors are prone to imperfection.) There are many many many business practices that harm the public good.
You do want companies dumping toxic chemicals into the ecosystem. You don't want companies so dominant that they harm the public good.
But in this case, the market is so young that I can't see how one can make any kind of judgement on it. Maybe in another 4 or 5 years, but today, no.

Measly 30% cut?
Unless you are swimming in money Scrooge McDuck style, if somebody takes 30% of your paycheck and restricts how you can earn money on the outside,where that cut is not taken, you would have to change your name to imgettingausedfordpinto ;)

I hope apple eats it for this move, huge apple fan but this is plain out wrong and will only hurt us users in the long run. kinda makes you wonder if apple had won the PC OS race back in the day instead of microsoft where would we be now as apple would've stiffled so much innovative software . Can you imagine if Microsoft tried to pull this in the PC market what would happen !?!

The problem is content providers set their prices based on what they can afford to offer the content. After their costs are taken into account, they probably make 30% - 50% profit. If Apple takes 30% off of the top, then the content provider is making nothing or very little. After all, these companies need to make money, or why even bother?
As a consumer, we should all be against Apple taking an extra 30% cut because, in the end, it's just going to mean 30% higher costs to the end user. There's just no way around it. It's just like when fuel costs go up, the cost of goods goes up for all of us.

Because if they set it lower, they would go out of business. If they set it higher, their sales would drop.
That's how economics works. If you want to assert the market for content works differently, the onus is on you to prove it.

Unless you think all content producers are simultaneously reaping economic profits (in the precise sense of excess profits abnormally out of line with market conditions, see http://bit.ly/idL7nl ), his point stands regardless. Economic profit is almost always signified by new competitors jumping on the opportunity to undercut, until competition whittles that excess profit down to sustainable levels where businesses can function, but there is little opportunity for a new player. We do not see any of the traditional signs of economic profit across the content industry (certainly not in books or magazines). If anything, we see the reverse -- newspapers, magazines, and book publishers are reporting losses and/or going out of business.
In the absence of such (excess) economic profit, new costs in production and distribution will be passed on to the purchaser in the form of higher prices.

As a consumer buying stuff, I don't care if the content producer, publisher or retailer/reseller makes a profit or not. The only thing I care about is the value I have on the prospective product versus the value of the money I must part with to obtain the product.
How much it costs to make the product, how much it costs to market, how much it costs to maintain & store, how much it costs to deliver, how the money is split up between the content producer, the publisher, or retailer doesn't matter one wit to me. Yes, this is not exactly true as we all have our belief systems, but in general, using the buying population as a whole, yeah, that's the way it works.
If the value of the product is such that its perceived price is lower than the cost of bringing the product to market and selling it, well, make a better product, raise the price to make sure a profit is made, or make it cheaper to produce and market.
Oh, but we all are screaming that this may mean that iOS consumers won't get Netflix, eBooks, e-radio, magazines, newspapers, whatnot. Yeah, I want to have everything as cheaply as possible, moreover, I want them for free. Apple should subsidize the cost of all these services for us! But that's just wishful thinking. TANSTAAFL.
Business entities have their own interests. Apple believes the iOS App Store is a huge asset for content producers, and has levied a toll and conditions for businesses to do business and make money. It may be the asset will make companies money. If the businesses don't think so, they won't participate. If the lack of such services devalues Apple's asset with bad iOS devices sales, Apple will have to do something different.
Do I think it devalues iOS devices? I don't know. There's been no repercussions yet.
Why do I think this way? All of these digital content companies aren't really competing with Apple. They are competing with "free" or highly competitive. They must know that their business models have been obsoleted and they must reinvent themselves and develop a new business model that works. There's huge price pressure to go down. I can watch lots of movies, hear lots of music, read lots of books for "free" or on Youtube; there's so much free news, magazine type article content already available, that the value of paid news, books, etc. have to go down.
Apple is not helping this, but I don't think they should be helping either. These businesses have to survive on their own merits.

It's even worse than that - the publishers will have to raise prices by 42% to get back to the original profit margin after Apple tatkes their bite. If they only raise by 30% they still get less than before because Apple gets 30% of the raise as well...
And if their margin is small, they will have to raise prices or take a loss on every sale - not a very good business model.

Love my Apple products, will never turn back. So this isn't an attack on Apple fanboyism.
For everybody defending Apple for this move, substitute Microsoft for Apple, then tell me how you'd feel about it...Thought so. It's a dick move, no other way around it.

Because of this I've finally reached the end of my patience with Apple. I've already sold my iPhone and picked up a new WP7 phone last night. After playing with it all night I wish I had made this change when the WP7 phones came out months ago. I would've been much happier... No regrets here.

Not worth worrying about. It will all work out in the end.
1) Apple is just and correct not to allow iOS app developers to sell "free" apps in the Apple App Store that actually are simply gateways to paid content, for which Apple gets no cut because a purchase is required outside the App Store. That's like me going to the DVD section of Best Buy with my used DVDs and selling them to Best Buy customers for cash right in the aisle and not giving Best Buy a cut. Actually, it's more like if I made Best Buy's employees sell my DVDs for me, including ringing up the transactions and processing their credit cards, and had them pay me from the money in their registers.
2) Apple is just and correct not to allow iOS app developers to offer lower prices outside the app store. Otherwise they'd be encouraging their customers not to purchase through the system which made the app they are selling possible; effectively cutting Apple out of their just and proper share. This is in essence exactly like the selling of "free" apps as addressed in point 1.
3) If the fee Apple charges app developers who sell paid content through the App Store is too high, and they don't feel Apple deserves the cut they are demanding, the app developers are always able to decide it is not in their best interest to have an iOS app and thus ignore that market until such time where the terms become more favorable.
4) Apple's cut (currently 30%) will eventually be proven by market forces to be fair or not. If enough content providers continue to choose not to participate in the App Store because Apple's cut is too high, Apple will see lost revenue and their iOS products will become less desirable to end users due to the lack of content; and Apple will be forced to lower the coat of admission to the app store.
Problem Solved.

While I can see this as anti-competitive, I don't get the anti-trust issue at all. Apple doesn't have a monopoly on subscriptions. Publishers don't have to have iOS apps if they don't want to.
I also think Apple's logic is kind of sound... They got the publisher a new customer and they want a little credit for that.

Why are people mad that apple is forcing people to use their AppStore to get apps. Don't you use the android market to get android apps, widows, and blackberry have their own app stores and that's the only place you can get apps from I'm pretty sure for all of them and don't they all get a percentage because nobody is gonna sell apps in their market or store and not make any profit it's rediculos to expect that or think it it's not monopolizing if they only allow apps they make a profit on to have acces to their devices.

Actually, Android has a number of open markets separate from the App Market. You are not required to use them. On top of that, on both Android and Blackberry you can download the program file directly from any web source and install it (note: AT&T has been locking down some phones from this feature, but every Verizon Android phone I've had as well as every Blackberry I've had still have this ability).
I'm sorry, but make sure you check your facts before you open your mouth. Apple is the only OS that is out-of-the-box unwilling to allow you to install anything else to your phone.
Imagine Bill Gates said you can only install his approved programs to your computer. You'd be pissed! Riots! Flames!
BUT WAIT!
A turtlenecked troll has said the same thing? Well, then, that's alright.

Somebody made a comment yesterday that people only buy the iPhone for the cool apps. I bought my first one and so did millions of others before their even was an app store.I'd still be buying if their was no app store. Companies want to be on IOS because it makes money. If you dont like it, go to some other OS and make 100% of nothing.